The Pin Factory Blog

The Seattle Times has come out strongly in favour of the legalization of cannabis, saying, “Marijuana should be legalized, regulated and taxed. The push to repeal federal prohibition should come from the states, and it should begin with the state of Washington.”

Quite right too. It is hard to think of many policies that have failed so abjectly as drug prohibition. Anyone looking for an example of the law of unintended consequences need look know further. As the Seattle Times points out:

It might work in North Korea. But in America, prohibition is the pursuit of the impossible. It does impose huge costs. There has been:

• A cost to the people arrested and stigmatized as criminals, particularly to students who lose university scholarships because of a single conviction;

• A cost in wasted police time, wasted court time and wasted public resources in the building of jails and prisons;

• A cost in disrespect for the law and, in some U.S. cities, the corruption of police departments;

• A cost in lost civil liberties and lost privacy by such measures as the tapping of private telephones and invasion of private homes;

• A cost in the encouragement of criminal lifestyle among youth, and the consequent rise in theft, assault, intimidation, injury and murder, including multinational criminal gangs; and

• A cost in tax revenues lost by federal, state and local governments — revenues that for this state might be on the order of $300 million a year.

Then there’s the fact that both No.10 Downing Street and the White House are currently occupied by people who admit to having used illegal drugs in their youth. Do they believe they should have been prosecuted? I very much doubt it.

Frankly, the case for ending our disastrous experiment with drug prohibition is virtually unanswerable – just as it was for alcohol in America seventy-eight years ago. Let’s hope that Washington State has the courage to set the ball rolling.

Apologies for the lack of blogging over the last couple of days. As you may have noticed, we’ve been having a few server problems. For the moment, we’re back up and running, and hopefully there won’t be any more issues. Thank you to everyone who called or emailed to say how much they were missing us. Your loyalty and enthusiasm is much appreciated!

Those with long memories will recall that the new government intended to clamp down on new regulation and insist, for example, that one existing regulation of similar or greater burden would be removed for every new one introduced. The only exemptions would be regulations derived from the EU, which we have no control over.

The 2nd report of the Regulatory Policy Committee (RPC) is just out. They reviewed 189 Impact Assessments (IAs) which appeared in the last quarter of 2010. Since one regulation may have more than one IA, that is not necessarily 189 proposed new regulations. Of the 189, 57 were EU sourced and 132 from Whitehall. The Coalition has changed the remit of the RPC to advising the new Reducing Regulation Committee (RRC) which is chaired by the Business Secretary, Vince Cable, and charged with rejecting unnecessary new regulations.

The RPC concluded “44 % of the IAs we scrutinised were, in our opinion, inadequate”. They do not report the split of inadequacy between Whitehall and Brussels nor whether the government (RRC) continued with the regulation nonetheless nor whether the regulation and IA re-appeared after further work. Neither do they produce any findings in terms of “one in and one out”. The number of IAs (189 in one quarter) indicates that the tide of new regulation is even higher under this government than the last.

The opinions of the RPC are not available to the public so we cannot assess any of these matters for ourselves. How is that for transparency? According to the BIS Library of IAs, accessed today, there have been only 14 IAs produced in the eight months to 31st January 2011. This includes the one to which the department (HMRC) failed to given a title or any detail. The BIS seems to have forgotten about their own system.

For 20 years governments have talked the talk on reducing, and challenging new, regulation. The 2nd report of the RPC seems to indicate that the Coalition is no more walking the walk on regulatory reduction and transparency than its predecessors.

Friday’s Financial Times contained a good summary of the tax rises and benefit reductions that are going to kick in in April (and beyond). It’s a useful list to refer to, since it’s easy to lose track of what the government has announced, and when the changes are set to take effect. I’m not going to reproduce their full list here. But here are three of the (six) tax rises listed as taking effect in April, with a brief comment on each.

National insurance rates rise 1 per cent. Changes for employers are likely to cost business £1.2bn a year, according to employers groups.

Of all the changes coming in, this one is the most ill advised. When you have high unemployment and low growth, the last thing you want to do is increase the cost to businesses of employing someone. On the contrary, cutting payroll taxes (and that’s what employers’ NICs are) or even suspending them altogether would be a far better move if you want businesses to create jobs and fuel a recovery.

Threshold for paying 40 per cent income tax falls from £43,875 to £42,475 (meaning an extra 20 per cent tax on £1,400 of income).

This is a sneaky move, especially when you consider how many people have already been dragged into paying higher rate tax by fiscal drag – that is, not increasing tax thresholds and allowances in line with inflation. The number of people paying higher rate tax doubled from 2m to 4m while Gordon Brown was chancellor, and experts expect another 5m to be caught over the course of this parliament. I’d like to see tax thresholds automatically indexed to wage inflation, so that governments are forced to be honest and open about raising taxes.

The Treasury begins increasing fuel duty by 1 per cent above inflation each year from April 2011 to April 2014.

OK, fuel duty is a reasonably efficient way to raise money, but when you consider that the price of petrol has already risen by about 18 percent since the beginning of 2010, it’s clear that this is going to be a real kick in the teeth for motorists (which is to say, just about everyone who doesn’t live in central London). After all, tax already accounts for about 60 percent of the petrol price you pay at the pump. It is also worth remembering that you pay VAT (already raised from 17.5 to 20 percent this year) on fuel duty. In other words, you are taxed on a tax. And if that isn’t a stitch-up, I don’t know what is.

The following memo, which has fallen into our hands, is a draft of advice to the new Irish Minister for Finance from a British colleague who has a wealth of expertise on how to handle economic crises. He prefers to remain anonymous for professional reasons.

Dear Minister,

Congratulations on your new appointment. As you read the civil service briefings on the present crisis, you will come to appreciate that Ireland's problems would be much easier to manage if your administration could choose the country's own exchange rate and interest rate. However, your officials and your colleagues may believe that there is no practical way to leave the present European monetary union and so achieve this flexibility.

In fact, there is. Leaving the euro is politically tricky and economically costly in the short-term. But it is far from impossible. The long-term advantages clearly outweigh the short-term costs, and the politics can be managed. The following outlines how it can be done:

1. Announce on a Sunday morning that Ireland is “temporarily suspending” its euro area membership.

It is obviously vital that this announcement come as a surprise to markets. So you cannot discuss it with many people in advance. The Taoiseach and the Governor of the Banc Ceannais na hÉireann must obviously be informed and agree. However, even discussing the idea in a wider circle is likely to lead to leaks; in turn, this will cause a run on Irish banks and a complete collapse of deposits, destroying what is left of the economy. [Continue reading]

Given the current state of the world you might not wish to believe economists who tell you that they know what to do about things. But there are indeed things about which economists do know what to do. These are largely, although not exclusively, in the fields of microeconomics – the study of incentives and prices.

More specifically, when we start to talk about pollution, or climate change, economists are adamant that such things as taxes, or cap and trade systems, are hugely cheaper than the sort of command and control systems, the you may and you may not licences and insistences, beloved of bureaucrats.

But as the Economist points out, this doesn't seem to be what people actually like. Despite the fact that these rule rather than incentive based systems are hugely more expensive (recall, this means that people must give up more of other things in order to have less pollution, that's what "more expensive" means here) people still seem to prefer the rule-based systems.

All of which really leads us to two conclusions. The first being that the education system is even worse than we thought.

The second that clearly we need to elect another people.

I used to go to conferences where incredibly intelligent and well-read liberal political scientists would agitatedly debate issues. The discussions would be full of ifs, buts, maybes and on the other hands, ending up in a sort of confusing fog.

Then FA Hayek would creak to the microphone, and the fog would be gone. He'd penetrate straight through all the ifs, buts, maybes and on the other hands, and show how simple the core problem was. Then he would show how obvious the solution was. Everyone would look stunned. The old man was right as usual. Next business?

I thought of this while reading Andrew Lilico's long response to Tom Clougherty's inflation blog. I wish we had a Hayek to cut through the ifs, buts, maybes and on the other hands, because they obscure the simple answer – just like those of that equally quick-witted economist, Keynes.

Tom was saying that inflation is not rising prices, but the over-increase of the money supply that causes rising prices; so it's the money supply that we should focus on. Andrew's reply is that what really worries us is rising prices, not the money supply, which we can't actually measure or control; and anyway, economic targets are all a bit iffy because you have to take other stuff into account. So it's not a case of targeting either money or prices, but targeting prices taking account of money, or targeting money taking account of prices.

Andrew's a much better economist than me, but this answer leaves us in a policy fog – a dangerous place to be. David Hume, who shared Hayek's fog-clearing ability, told us all we need to know: when you create too much money, it becomes worth less. As for how to control that supply, another fog-buster, Milton Friedman, gave us a clear answer: 100% reserve banking and a monetary rule. The former stops the banks messing up your policy by creating their own money, while the former stops officials, with all their ifs, buts, maybes and on the other hands, trying to be too clever. Simple.

No doubt you will have been watching the Great Revolution in Wisconsin this past week? As the public sector unions decided to rise up en masse against their newly, democratically, elected government?

The one little part of it all that fascinated me was a report from the EPI, a union funded think tank in Washington DC, about how public sector workers weren't in fact overpaid at all. No, not even when we include pensions and days off. Which is really rather a surprise really, that they actually earn less.

For a start, what are they all in a union for if this means that they get paid less?

But the thing is, if you read through the report, everything is about average wages. Well, of course you might say, but then, which average?

You see, when we start to compare wages we really should be using median wages, not mean average wages. Partly because the median represents the position of the average individual, rather than the average across individuals. Partly because wages have a zero lower bound and no obvious top limit, meaning that again the median is more representative than the mean which can be skewed wildly upwards by a very few very highly paid people.

And partly because that last reason there is going to be markedly different between people in the public and private sectors. We know very well that the income distribution is compressed in the public sector: the high paid get nothing like the millions potentially on offer in the private sector.

Now I don't in fact know whether the mean or the median was used here, because the report itself doesn't say. But looking quickly at the source data, it looks to me as if means are being used.

Which is, I think you'll agree, very naughty. We know that the mean public sector wage will be lower than the mean private sector simply and precisely because the wage distribution is compressed in the public sector. Meaning of course that what we'd really like to see is a discussion of medians....you know, those medians which the EPI uses when it's talking about wages in other contexts? Like the ones that bolster its story then?

But hey, don't worry about it, this is politics, right, not statistics or anything important....

This week’s announcement from Network Rail that it would be devolving its core business units has important implications for the future of UK railways. Crucially, two of its regionally to-be-devolved units – Scotland and Wessex – have been established to overlap with the franchise areas for FirstGroup’s ScotRail and Stagecoach’s South West Trains; this is no co-incidence.

Currently, only the pint-sized Isle of Wight railway is vertically integrated although moves are afoot to extend the process to the self-contained Merseyside network. Whilst the separation of track and train has had its supporters, notably the Treasury at privatisation in the 1990s, a series of fatal railway accidents and the financial collapse – necessary or otherwise - of Railtrack brought about a radical shift in priorities. Understandably, safety rapidly moved up the agenda so that Railtrack’s successor, Network Rail, was given a wide-ranging mandate to repair, to improve and to invest.

Network Rail’s net debt now exceeds £23 billion – and is still going northwards. Moreover, its operating cost base has soared and its bureaucracy has become more entrenched. Indeed, the Office of Rail Regulation concluded that, in 2008, Network Rail was between 34-40% less cost efficient than its top European infrastructure counterparts. Hence, new thinking should be welcomed. The long-term aim should be to part- integrate the railways – probably on piecemeal basis – but retaining a handful of companies – say between four and ten - for comparative purposes.

In doing so, competition should be established through the comparative cost mechanism – a process that has taken place in the water sector for years. Comparative competition also drove down costs sharply in the 12 Regional Electricity Companies that were privatised in the 1990 as they sought to outperform one another. It would be ironic, would it not, if the eventual UK railway network eventually resembled the pre-war set-up when four integrated companies ruled the roost?

Ireland goes to the polls today, although the headline result is already a foregone conclusion. The ever-so-slightly-centre-right Fine Gael – think Edward Heath on a wet day – will win a plurality of seats, or possibly a majority, and its leader Enda Kenny will become Taoiseach. What’s interesting is that for the first time in Irish history, Fine Gael might be able to form a government alone, without having to go into coalition with the Labour party. It’s not likely, but this could have implications for the Irish debt and the future of the eurozone.

If Fine Gael do make a government alone, it’ll probably be with the help of four or five independent MPs – economists and businessmen who’ve run opposing the bailout and debt repayments, and tend to be quite economically liberal overall. This would be the ideal outcome for Ireland, but these independents are strongly against the current bailout settlement and may push for a partial default (which would be a good ‘nuclear option’ when the new government tries to renegotiate the bailout terms). Enda Kenny refused to rule out a partial default at this week’s debate, although he and his party haven’t shown the backbone that would require so far.

That would create exactly the situation that many warned about last November, when the Chancellor lent Ireland £7bn of British money, or, to be precise, borrowed an extra £7bn on Ireland’s behalf, acting as guarantor to the money. Ireland’s debt is over £100bn and the economist Constantin Gurgdiev, who’s been remarkably prescient about the crisis so far, thinks that a default is unavoidable. 

That would probably mean Ireland being expelled from the eurozone, and might destroy the currency altogether. I don’t know what the global implications of that would be, but it’s probably safe to say it wouldn’t be good. But it would be irrational for the new government to do anything else: default seems a lot better for Ireland than carrying around that debt with its 6% interest rate and the interest payments on the bailout alone are about 10% of total government expenditure. It's a pity that it'll mean catastrophe for the rest of us.